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This is the worst argument for the Fed to raise rates

Published Sep. 4, 2015

WASHINGTON — People used to say the Federal Reserve had to raise rates to fight nonexistent inflation. Then they said the Federal Reserve had to raise rates to fight nonexistent bubbles. And now they say the Federal Reserve has to raise rates for nonexistent reasons. Just, you know, to show that it can.

This is not progress.

What is, though, are all the jobs the economy has been adding. That's been an average of 243,000 a month for the past 12, which has been enough to drive unemployment down, as reported Friday, to 5.1 percent. Now, that sure looks like a return to economic normalcy, so shouldn't the Fed return us to interest rate normalcy by increasing them from zero? Maybe. The Fed, after all, doesn't want to wait until the economy is obviously overheating to start raising rates, but rather right before it does so.

The only problem with that is there aren't any signs the economy is anything other than properly heated right now. Workers still aren't getting bigger raises, just 2 percent a year compared with the 3.5 to 4 percent they normally would, and inflation is still dead at just 0.3 percent.

That picture doesn't change even if you strip out volatile food and energy prices, with so-called core inflation at only 1.2 percent, and not even trending up. Given that raising rates too early would hurt more than raising them too late — more unemployment we don't want would be worse than more inflation we do — and it's hard to see why the Fed should do so this month.

But some people are tired of this debate. The Fed hinted it might raise rates, and that's what they want it to do, regardless of the data. "What are you worrying about, September or December," former Fed governor Laurence Meyer wondered, when "it doesn't matter" and the Fed should "just pull the trigger." Economist Tyler Cowen said he "would consider a 'dare' quarter-point increase just to show the world that zero short rates are not necessary for prosperity and stability." And New York Times columnist William Cohan implored the Fed to "show some spine" and start hiking despite the selloff.

These are psychological arguments, not economic ones. Hawks have given up trying to justify higher rates with warnings about inflation or bubbles. They tried that for years and have been wrong for years. So now it's about showing markets that not only is the Fed "tough," but also that it thinks the economy is tough enough to handle higher rates. The rationale keeps changing, but the conclusion doesn't. No matter what, even if the dollar is up, inflation is down, and wages aren't rising, it's a good time to raise rates.

Just don't ask them why.

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